Business context and reporting period
Herman Miller, Inc. (the company identified in the filing; the filing predates the MillerKnoll name) reports its fiscal second quarter ended December 3, 2011, and first six months of fiscal 2012. The quarter and comparable prior-year quarter each had 13 weeks; the current six-month period had 27 weeks versus 26 weeks a year earlier, so year-to-date comparisons include an extra week. The company designs, manufactures, and sells workplace and specialty furniture through North American, Non-North American, and Specialty and Consumer segments.
Financial results and condition
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $445.6 million, up 8.1% | $903.7 million, up 14.0% |
| Gross margin | $152.1 million; 34.1% of sales, up 120 basis points | $306.4 million; 33.9% of sales, up 120 basis points |
| Operating earnings | $40.7 million; 9.1% margin, versus $31.5 million | $82.5 million; 9.1% margin, versus $60.7 million |
| Net earnings | $23.7 million, versus $17.9 million | $48.3 million, versus $34.0 million |
| Diluted EPS | $0.41, versus $0.26 | $0.83, versus $0.48 |
| Operating cash flow | $38.7 million for six months, versus $30.5 million |
Quarterly gross-margin improvement reflected pricing and higher production leverage, partly offset by increased commodity costs. Operating earnings improved despite higher operating expenses; the prior-year quarter included a $4.4 million favorable Nemschoff purchase-contingency adjustment and $2.1 million of restructuring expense. The prior-year diluted EPS comparison was also affected by contingent-consideration accounting; that consideration had been settled in fiscal 2011.
At December 3, 2011, cash and cash equivalents were $181.0 million and marketable securities were $9.7 million. Long-term debt was $250.0 million, with no current maturities shown. Total current liabilities were $235.9 million and stockholders’ equity was $250.7 million. The revolving facility provided $150 million of capacity; after $9.9 million of letters of credit, $140.1 million remained available. The company reported compliance with its debt covenants.
Six-month investing cash flow was positive $0.9 million, including $13.8 million of proceeds from dealer sales and $13.2 million of capital expenditures. Financing cash flow was negative $0.1 million; dividends paid were $2.5 million. The declared dividend was $0.022 per share per quarter.
Changes versus the prior comparable period
- Quarterly orders declined 4.7% year over year to $440.0 million; backlog fell 10.7% to $280.8 million. Management cited lower federal-government orders and orders pulled into the first quarter ahead of a 2.5% price increase. It estimated $10 million to $12 million of orders shifted forward.
- Sales rose across all three segments. Quarterly sales were $321.7 million in North American Furniture Solutions, $87.5 million in Non-North American Furniture Solutions, and $36.4 million in Specialty and Consumer. Non-North American operating earnings rose to $8.8 million from $4.0 million.
- The company sold three wholly owned dealerships during the first half. Management estimated the sales reduced current-quarter North American segment sales and orders by about $10 million each.
- Net cash increased to $181.0 million from $142.2 million at fiscal year-end. Long-term debt remained $250.0 million; the company had reduced debt by $50 million in the prior fiscal year.
Outlook, risks, and unusual items
- Management expected the full-year effective tax rate to be 32%–34% and fiscal 2012 capital spending to be approximately $35 million, compared with $30.5 million in fiscal 2011.
- The cited BIFMA forecast anticipated domestic industry orders and shipments moderating in the remainder of calendar 2011, with calendar 2012 declines of approximately 1% and 2%, respectively. This is an industry forecast, not company guidance.
- Management said available cash, operating cash generation, and borrowing capacity should adequately fund operations and capital needs. It was also exploring employee-benefit plan funding and operating options. After quarter-end, the company contributed $5.1 million to domestic benefit plans and estimated another $4.1 million of contributions for the rest of fiscal 2012.
- Key risks include economic activity and customer capital spending, competitive pricing, commodity prices and supplier availability, foreign exchange, dealer and customer financial strength, pension asset returns and discount rates, and litigation or government audits. A 100-basis-point change in the primary U.S. pension discount rate was estimated to affect the pension obligation by about 10%, or approximately $30 million.
- Contingencies include performance bonds with maximum exposure of approximately $11.6 million and standby letters of credit of $9.9 million; no liabilities were recorded for these arrangements. A U.K. facility dilapidation obligation was estimated at $0–$3.0 million, with $1.2 million accrued. Management did not expect pending ordinary-course litigation or potential GSA audits to materially affect the financial statements.
- The company expected to complete its acquisition of POSH Office Systems during fiscal 2012. The filing gives no clear purchase price or closing date.
Important facts for investors to verify
- Whether order and backlog declines persist, especially in federal-government and North American dealer channels, and how the pricing increase affects demand.
- Whether gross-margin gains continue as commodity costs, production levels, discounts, and product mix change.
- How the extra week affects year-to-date comparisons and whether sales growth translates into sustainable cash generation.
- Actual fiscal 2012 capital expenditures, pension contributions, and any changes in debt or revolving-facility availability.
- POSH acquisition timing, terms, and expected financial contribution, which are not specified clearly in this filing.
- Exposure to pension assumptions, dealer-related obligations, warranty claims, and the disclosed guarantees and contingencies.